Summary of a Recent
Judicial
Development in
Secured Transactions
Bank's Security Interest in Government
Payments Not Perfected
Joshua T. CrainNational AgLaw Center Graduate Assistant
Summary of Decision
In In re Stevens, 307 B.R. 124 (Bankr. E.D. Ark. 2004), the United States Bankruptcy Court for the Eastern District of Arkansas ruled that Union Planters Bank had not perfected its security interest in debtor-farmers' direct and counter-cyclical program (DCP) payments because the financing statements filed by Union Planters Bank were not filed in the proper location.
Background
In May 2002 debtor-farmers executed a promissory note for $583,000 with Union Planters Bank (Union Planters) and granted to the Bank a security interest in government payments. See id. at 126. In addition, Union Planters filed a financing statement (UCC-1) in both Craighead and Jackson counties, Arkansas that claimed an interest in the debtors' crops, government payments, and any after-acquired property relating to debtors' crops and government payments. See id. at 127.
After completion of the Farm Service Agency assignment document by the debtor-farmers in October 2002, the DCP payment entitlement accrued to the debtor-farmers. See id. at 130. On February 10, 2004, the debtors filed for bankruptcy. See id. at 128. The impetus of this case was the attempt by the debtor-farmers to obtain a crop operating loan pledging the DCP payments as collateral. See id. at 126. Union Planters argued that because the debtor-farmers had granted a security interest in after acquired-property arising from the government payments to them, which attached in October 2002, the DCP payments could not be pledged as collateral for the 2003 crop operating loan. See id. at 130. Further, Union Planters argued that the UCC-1 filings in Craighead and Jackson counties perfected its security interest in the DCP payments. See id. at 131.
Analysis and Holdings
The court stated that due to the after-acquired property clauses in the parties' security agreements, Union Planters had a security interest in the DCP payments and that the interest attached in October 2002 when the debtors completed the FSA assignment. See id. at 130. The court explained, however, that the issue was whether Union Planters properly perfected its security interest in those DCP payments when it filed the UCC-1 filings in Craighead and Jackson counties. See id. at 131.
The court found error with Union Planters' reliance on Ark.Code Ann. § 4-9-501(a)(2), which provides in pertinent part that the proper location of filing is "the office of the circuit clerk in the county in which the debtor is located in this state if the debtor is engaged in farming operations and the collateral is equipment used in farming operations, or farm products, or accounts arising from the sale of farm products." See id. The court explained that the collateral in issue - the DCP payments - would be considered either accounts or general intangibles under the Uniform Commercial Code (UCC), and further agreed with the Eight Circuit's analysis in Kingsley v. First American Bank of Casselton, 865 F.2d 975 (8th Cir. 1989) where a similar issue was addressed. See id. at 132. However, the court stated that the DCP payments were not accounts arising from the sale of farm products as set out in Ark.Code Ann. § 4-9-501(a)(2) and relied upon by Union Planters. See id. Rather, the court stated that the proper section was Ark.Code Ann. § 4-9-501(a)(3) which provides that in all cases other than those addressed in § 4-9-501(a)(2) the proper place to file a financing statement is the office of the Arkansas Secretary of State. See id.
Because Union Planters did not file with the Secretary of State, the court ruled that its interest was not perfected in the DCP payments and that the debtors, as debtors in possession having the status of judicial lienholders, could avoid Union Planters' security interest under 11 U.S.C. § 544. See id. at 133.
The case was decided on March 3, 2004; this summary was posted Sept. 14, 2004.